Market commentary: The US Jobs Report and the Chinese Central Bank

On Friday, markets closed the week posting an overall positive session with some visible gains on the board after a rather volatile week that saw investors booking losses across all major asset classes.

On Friday, European stocks posted a resilient rebound partially recovering from the drops recorded earlier last week, while the US equity markets also rose on the back of a positive Jobs Report that has helped investors shaking off the disappointing economic data related to GDP growth.

Overnight, most of Asian markets posted sizable daily gains after the Central Bank of China, on Sunday, announced additional easing measures to help supporting the country’s slowing down economy.

Bond markets, especially European Sovereign papers, also gained, pairing some of the losses recorded over the past ten sessions, with the German bunds witnessing high volatility, swinging from additional losses to gains, while taking most of the peripheral bonds with them.

While markets continue to face high volatility and European Member States prepare for a Summit on Greece taking place today, on Friday the spot light was pointed on the US Non-Farm Payroll Report, with investors across the globe closely watching the latest developments within the largest economy’s labor market, turning into buyers after receiving positive news.

Following the disappointing economic data in April, with the US GDP stalling and March’s jobs additions coming in way below expectations, analysts were concerned that another disappointing report would exacerbate the ongoing selloff, raising questions on the real strength of the world’s leading economy.

The official number released on Friday was 223,000 new jobs, which, despite narrowly missing analysts’ forecasts for 228,000 additions, proved to be a solid figure pushing stocks higher and giving some breading room to traders and investors that had been taking money off the table throughout the entire week.

The positive jobs report did confirm that March’s reading of 126,000, which was actually revised down to 85,000 on Friday, was most likely due to temporary factors and that the US economy seems to still be on track. Unemployment fell to 5.4%, the lowest level in almost 7 years, moving closer to the range the Federal Reserve considers to be full employment and prompting analysts to believe that the largely anticipated interest rate hike will still be on the FED’s agenda at its next Monetary Policy’s meeting.

The participation rate has ticked slightly higher to 62.8%, but it still remains stuck at multi-year lows on historical bases, highlighting the fact that the US labor force is still witnessing a fair amount of workers who had stopped looking for a job all together and are now living out of the country’s welfare system. Another positive sign came for wages, with the hourly rate gaining 0.1% month-on-month and 2.2% from the same period a year ago, finally turning into a positive trend ahead of the next FED’s policy meeting.

Over the weekend, on the other side of the Pacific, the Chinese Central Bank moved forward to implement additional monetary easing measures as several analysts have been predicting and anticipating. On Sunday the second largest economy’s Central Bank announced an additional cut to interest rates, the third in six months, in an attempt to support the country’s slowing economy.

While this measures fuelled a rally in Asian equity markets, it is also raising some concerns among analysts that China will no longer be able to sustain its historical high growth rate, which will eventual put additional pressure on exporting economies such as Germany, Australia and Canada.

In addition to monetary policies, China has also been using it huge stash of foreign reserves to help spurring internal demand and finance development projects, with data showing that over the first quarter of the year the Asian giant posted its third largest quarterly drop in reserves.

While this trend is neither alarming, not concerning, it is probably adding to the down pressure of European bonds that are already negatively affected by the ongoing Greek crisis. In short, some analysts believe that the Chinese Central Bank, which has historically been a large buyer of Europe’s sovereign debt in an attempt to diversify its reserves away from dollar denominated paper, is now turning into a net seller that, in the short term, may very well exacerbate the “risk off” attitude of the markets toward European sovereign bonds.

This article was issued by Paolo Zonno, Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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